Cash Flow Monitoring for Long-Term Solvency

Why SBOs should consider implementing cash flow monitoring as a long-term solvency solution

Beyond ensuring monthly liquidity for operations, why should SBOs consider implementing cash flow monitoring as a long-term solvency solution? Knowing how your district’s monthly revenue and expenditures are trending supports healthy cash reserve planning and timely monitoring of your financial forecast.
Strong fiscal management is grounded in being able to effectively track variances between monthly estimates of revenue and expenses compared to actual results.

Cash flow balances

Figure 1 is an example of a district’s monthly cash flow balance resulting from its monthly income and expense activity. These data help school business officials answer these questions every month:

• How does this year’s monthly cash flow compare to last year?
• How does this year’s annual cash flow total compare to the forecast?
• Is there any indication that this year’s forecast (and possibly subsequent years) may change?
• Are there months when the cash balance is stressed?

 
Figure 1

 
The bars in Figure 1 represent the “ebb and flow” of the district’s monthly cash balance. Peak cash balance months develop as districts receive real estate revenue advances in August and April. Low cash balance months occur as the real estate advances are used by monthly expenses that exceed revenue.

Even though this district’s ending cash balance is positive at the beginning and end of the fiscal year, a negative cash balance is projected for March. The school business office must project how much the district will spend and receive in revenue monthly to know when and how much cash flow borrowing is required to meet the daily operational needs of the district.

While this example provides insight for a district anticipating cash balance issues within the fiscal year, school districts can run into situations where year-to-date monthly trends provide a financial scenario that is different from what the district’s annual budget was estimated to be.

Budgets typically are set before the fiscal year commences; however, as the school year progresses, actual results can change what the year-end totals will look like. Cash flow forecasting provides an additional analysis of how the district is performing in relation to the budget and helps determine if any changes to the budget are necessary.

Year-to-Date Analysis

Table 1

Table 1 shows that the district’s revenue is trending lower for the current fiscal year when compared to the amount received during the same period for the previous fiscal year. If this variance was not expected, the CFO must determine whether it is due to timing or an unanticipated decrease in revenue. The answer to these questions could change the district’s inter-year cash flow projections and can help them construct cash flow estimates for the remaining months.
 

Monthly Projections to Complete the Analysis

Cash flow forecasting of monthly projections for the remaining months of the fiscal year helps construct an annual total from actual/estimated monthly data to compare to annual forecast/projection.

One method to establish projections for the remaining months is to compare your current year’s projections to the previous year’s actual amounts. Some revenue and expenses follow trends or patterns from year to year.

SBOs can use this pattern method when the revenue/ expense line item they are reviewing is cyclical—for example, real estate tax collections that occur every August and March, large contract amounts that are due the during the same period every year, etc. Once monthly actual data is available, the SBO can hone projection levels for the remaining months.

This recent-month method is most often used with regard to salary and benefits. After a district finalizes its contract terms and hiring needs for the year, month-over-month expense levels typically will be consistent.

Using September or October as the base month, in combination with historical monthly fluctuations, can provide cash flow projections for the remaining months that will enable districts to determine if the district is trending toward or away from the annual budget amounts.

An additional method to complete monthly cash flow projections is to calculate the average percentage of annual revenue or expenditures that occurred monthly over the past three to five years. This monthly allocation of cash flow forecasting is often used for revenue and expenditures that tend to be more volatile in monthly year-over-year behavior.

If during the past five years the district spent 10% of its supply expenses in December, the SBO would multiply the budget amount by 10% to calculate the December cash flow projection amount for supplies. The multi-year averaging smooths out the volatility of a single year.

These are just three methods an SBO can use to calculate cash flow projections. Perhaps the most important step in this process, however, is the analysis of the data once the projections are complete.

What Is Your Cash Flow Telling You?

While school districts spend a considerable amount of time developing their budget, the district’s revenue and expenditures rarely total the budgeted amount from the beginning of the year.

Table 2

 
The example in Table 2 shows that revenue projections for the remaining months are significantly lower than the amounts collected in the previous fiscal year. The district’s cash flow forecast has projected a 67.7% decrease in All Other Revenue. The significant drop estimated in these cash flow projections verifies the district’s anticipated revenue levels in the annual budget.

Even though the district’s annual budget may be set annually, cash flow forecasting is a continuous process that should be monitored and analyzed every month. This will provide the SBO with the capability to identify when the finances are going astray from the annual budget, determine the impact on the monthly cash balance of the district, and report out the impact on the district’s current and future fiscal stability.

Authors: Ryan Stechschulte, Andrew Geistfeld, and Ryan Ghizzoni, SFO
Ryan Stechschulte is Treasurer/CFO for Toledo City School District in Toledo, Ohio, and an ASBO Board member.
Andrew Geistfeld is Treasurer/CFO for Upper Arlington City School District in Columbus, Ohio.
Ryan Ghizzoni is a Director, Analytics for Frontline Education.
 
This article originally appeared in the March 2022 issue of School Business Affairs magazine and is reprinted with permission of the Association of School Business Officials International (www.asbointl.org). The text herein does not necessarily represent the views or policies of ASBO International, and use of this imprint does not imply any endorsement or recognition by ASBO International and its officers or affiliates.